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Cost Management > Test Two > Flashcards

Test Two Flashcards

1
Q

What is the flow of costs?

A

Indirect Costs -> Cost Pool / Cost Allocation = Costs Allocated

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2
Q

Job Costing

A

Unit or multiple units of distinct product/service

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3
Q

Process Costing

A

Masses of identical or similar units of product/service

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4
Q

Five-Step Decision Making Process

A
  1. Identify Problem & uncertainties
  2. Obtain Info
  3. Predict the future
  4. Choose among alternatives
  5. Implement, evaluate, learn
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5
Q

Actual Costing

A

Direct costs are based on actual direct costs rates and actual quantities
Indirect costs are based on actual indirect cost rates and actual quantities

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6
Q

Normal Costing

A

Direct costs are based on actual direct costs rates and actual quantities
Indirect costs are based on budgeted indirect cost rates and actual quantities

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7
Q

Absorption Costing

A

ALL manufacturing costs
(fixed and variable) are
included as inventoriable
costs

DM + DL + VOH + FOH

Highest COGS
No Period Costs

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8
Q

Variable Costing

A

ALL variable manufacturing costs (direct and indirect) are included as inventoriable
costs
ALL fixed manufacturing costs are treated as period
costs

DM + DL + VOH

Between Absorption and Throughput

FOH is a period cost

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9
Q

Throughput costing

A

ONLY direct materials costs
are included in inventoriable
costs
ALL other costs (labor, overhead, etc.) are treated
as period costs

DM only

DL + VOH + FOH are period costs

Lowest cost of goods sold, highest period costs

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10
Q

Job Costing Approach

A
  1. Identify Job
  2. Identify Direct Costs
  3. Select Indirect Cost Allocation Base
  4. Identify Indirect Costs
  5. Compute Indirect Cost Rate
  6. Compute Indirect Cost Allocation
  7. Compute Total Costs
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11
Q

Cost Pool Definition and examples

A

Grouping of actual or budgeted individual indirect cost items

Manufacturing Overhead
Depreciation
Indirect Materials
Indirect Labor

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12
Q

Cost Allocation Base Definition and examples

A

Systematic way to link
cost pool to cost object

Direct Labor Hours
Machine Hours
Direct Materials
Revenues
Units produced

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13
Q

Cost Allocation Rate Definition and formula

A

Rate at which indirect costs are allocated to a cost object for a given allocation base

Cost Pool / Cost Allocation Base = Cost Allocation Rate

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14
Q

Fixed Overhead Allocation Rate Formula

A

Budgeted Fixed Manufacturing Costs / capacity (Units, Machine Hours, etc.)

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15
Q

Theoretical Capacity

A

level of capacity based on producing at full efficiency all
the time

Supply based

Highest production estimate

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16
Q

Practical Capacity

A

level of capacity achieved when the theoretic capacity is reduced by assuming some unavoidable production delays

Supply based

Between theoretical and normal

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17
Q

Normal Capacity

A

level of capacity that satisfies average customer demand over a several year period that includes seasonal, cyclical, and trend factors

Demand Based

Bottom two capacity estimate

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18
Q

Master-Budget Capacity

A

level of capacity that managers expect for the current
budget period (typically 1 year)

Demand Based
Bottom two capacity estimate

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19
Q

Job Costing Direct Material Cost Journal Entires

A

Debit: Materials Control
Credit: Cash (Accounts Payable)

Debit: Work in Process Control
Credit: Materials Control

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20
Q

Job Costing Direct Labor Cost Journal Entiry

A

Debit: Work in Process Control
Credit: Cash (Accounts Payable)

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21
Q

Job Costing Indirect Materials Journal Entry

A

Debit: Manufacturing Overhead Control
Credit: Materials Control

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22
Q

Job Costing Indirect Labor Journal Entry

A

Debit: Manufacturing Overhead Control
Credit: Cash (Accounts Payable)

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23
Q

Job Costing Depreciation Journal Entry

A

Debit: Manufacturing Overhead Control
Credit: Accumulated Depreciation

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24
Q

Job Costing Utilities/Insurance/Other Journal Entry

A

Debit: Manufacturing Overhead Control
Credit: Cash (Accounts Payable)

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25
Q

Job Costing Allocation Overhead Journal Entry

A

Debit: Work in Process Control
Credit: Manufacturing Overhead Allocated

Manufacturing Overhead Allocated is a contra-asset

Allocated based on overhead application rate given Actual cost allocation base usage

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26
Q

Job Costing Finished Goods Journal Entries

A

Debit: Finished Goods Control
Credit: Work in Process Control
Debit: Cost of Goods Sold
Credit: Finished Goods Control

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27
Q

Adjusted Allocation Rate End of Period Adjustment

A

Restate ALL overhead allocation entries in the GL using actual overhead, instead of budgeted cost rates
Results in adjustments to all inventory and COGS amounts
This approach is timely and allows for normal allocation
throughout the year and then an easy “true-up”
Makes adjustments to BOTH the job cost record and the
GL/Income Statement

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28
Q

Proration Approach End of Period Adjustment

A

Spreads any under/overallocated overhead across WIP, Finished Goods, and COGS proportionally – but only on Financials/GL
Allocates based on period-end or year-end balances (either
totals, or specific allocated overhead balances)

Take total book value of work in process, finished goods, and cost of goods sold. Find the percent of the total. Multiply percent by adjustment necessary.

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29
Q

Write-off to COGS End of Period Adjustment Journal Entry and Definition

A

Debit: COGS
Credit: Manufacturing Overhead Allocated
Typically used when over/under allocation is small relative to
income levels

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30
Q

Production Volume Variance Formula

A

Budgeted Fixed Overhead - Allocated Fixed Overhead

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31
Q

How do you clear Manufacturing Overhead Control?

A

Credit Manufacturing Overhead Allocated for the specific job

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32
Q

Major difference between Job Costing and Process Costing

A

Major difference between the two is how much we average costs over the units of production

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33
Q

What are the two costs in Process Costing?

A

Direct Materials
Conversion Costs - direct labor & overhead

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34
Q

How does the time of input of costs in process costing affect valuation?

A

The time of input changes the equivalent units when a good is still in work in process

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35
Q

5-Step Process Costing Process

A
  1. Summarize Flow of Physical Units
  2. Compute Output in Equivalent Units
  3. Summarize Total Costs to Account For
  4. Compute Unit Cost per Equivalent Unit
  5. Assign Total Costs to Completed and Uncompleted Units
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36
Q

Equivalent Units Definition

A

are a derived measure of output calculated by taking the quantity of each input in units
completed and incomplete WIP and converting the quantity of input into a “theoretical” number of completed units

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37
Q

Direct Materials Process Costing Journal Entry

A

Debit: Work in Process – Mixing
Credit: Cash (Accounts Payable)

38
Q

Conversion Costs Process Costing Journal Entry

A

Debit: Work in Process – Mixing
Credit: Various Accounts (Cash, A/P, Depreciation, etc.)

39
Q

Transfer from Mixing to Bottling Process Costing Journal Entry

A

Debit: Work in Process – Bottling
Credit: Work in Process – Mixing

40
Q

Effect of Conversion Percentage Underestimate

A

Cost of Goods Sold is Higher

41
Q

Effect of Conversion Percentage Overestimate

A

Cost of Goods Sold is Lower

42
Q

Weighted Average Method Process Costing Definition and EU Formula

A

Calculates cost per Equivalent Unit of all the work done to date

EUs Completed & Transferred + EUs in Ending WIP

43
Q

FIFO Process Costing Definition

A

1) Assigns costs of previous period WIP to first units completed
2) Assigns costs of EUs worked on during current period first to complete beginning WIP
3) Assigns costs of EUs worked on during current period next to start/complete new units
4) Assigns costs of EUs worked on during current period last to ending WIP
Under FIFO, work done on beginning WIP is kept separate from work done during current period
Costs per EU are only calculated using costs from current period and EUs of work started during the period

44
Q

Comparison of Weighted Average and FIFO for Process Costing

A

Weighted Average
Pros: Easy to Calculate, More Representative average unit cost when prices fluctuate
Cons: Makes difficult period to period comparisons of costs
FIFO
Pros: Info on costs in current & prior periods, better evaluate firm performance to budget
Cons: More complex calculation

45
Q

Percent of Completion for Transferred in Costs

A

100%

46
Q

Hybrid Costing System Definition

A

blends characteristics from both job-costing and
process-costing systems

47
Q

Operations-Costing System

A

is an example of a hybrid costing system that
can be applied to batches of similar, but not identical, products
Specifically identifies Direct Materials used, but
allocates conversion costs by process

48
Q

Activity-Based Costing System Definition

A

refines a costing system by identifying individual activities as the fundamental source of indirect costs
An Activity is an event, task, or unit of work with a specified purpose (e.g., designing product, operating machines, or distributing product)

49
Q

Product-cost cross-subsidization Definition

A

is the idea that if a company undercoats one
of its products, it must overcost another product

50
Q

Refining of a Cost System process

A

Replace use of broad-based averaging with more precise measurement of indirect costs
Demand for refined cost systems has been driven by:
1) Increase in diversity of products
2) Increase in indirect costs with different drivers
3) Increase in competition in the market
To refine a cost system:
1) Trace more costs as direct costs
2) Increase number of cost pools
3) Increase number of cost drivers

51
Q

Cost Hierarchy Definition

A

categorizes cost pools on the basis of
different cost drivers, or degree of difficulty in determining a cost/cost driver relationship
1. Output unit-level Costs
2. Batch-Level Costs
3. Product Sustaining Costs
4. Facility Sustaining Costs

52
Q

Output unit-level Costs Definition and Ranking

A

Costs of activities performed that vary with each unit of cost object
Examples: Machine Costs
Most exact

53
Q

Batch-Level Costs

A

Costs of activities that vary with a group of units of the cost object
Examples: Setup Costs, QC Costs
Second most exact after output unit-level

54
Q

Product Sustaining Costs

A

Costs of activities undertaken to support individual products/services, regardless of units or batches
Example: Design Costs, Engineering Costs, Storage Costs
Second most broad after Facility Sustaining

55
Q

Facility Sustaining Costs

A

Costs of activities that can’t be traced to individual cost objects
Example: Insurance, Rent Expense, Depreciation, etc.
Most broad

56
Q

Who Benefits from Activity Based Costing

A

Companies allocating significant indirect costs across 1 or 2 cost pools
All or most cost pools are identified as output unit-level costs
Products make diverse demands on resources
Products show small profit margins on products they are well-equipped to make
Substantial disagreement exists with reported costs of manufacturing and marketing products

57
Q

Costs of Activity Based Costing

A

ABC requires A LOT of calculation
ABC requires frequent updates to rates/calculations
As cost pools increase, increased chance of misallocating costs
If incorrect, or imprecise cost-allocation bases are used, could result in inaccurate/misleading costs
Substantial disagreement exists with reported costs of manufacturing and marketing products

58
Q

Activity Based Management Definition

A

is the method of management decision making that uses activity based costing information to improve customer satisfaction and profitability
Pricing & Product Mix
Cost Reduction & Process Improvement
Design Decisions
Planning & Managing Activities

59
Q

Cost Reduction & Process Improvements Examples

A

Allows managers to focus on how and where to reduce costs
Can set cost reduction goals by activity
Focus on removing “non-value add” costs

60
Q

Design Decisions from Activity Based Management Examples

A

Can company find ways to decrease complexity
Will customers pay for “less-complex” product

61
Q

Planning & Managing Activities from Activity Based Management Examples

A

Managers compare budgeted to actual to evaluate how well activities were managed

62
Q

Cost of Quality Definition and Costs

A

system is a methodology that allows an organization
to determine the extent to which its resources are used for 1) activities
that prevent poor quality, 2) activities that appraise quality of products,
and 3) activities that result from internal and external failures

  1. Appraisal Costs - Conformance Costs
  2. Prevention Costs - Conformance Costs
  3. External Failure Costs - Non-conformance Costs
  4. Internal Failure Costs - Non-conformance Costs
63
Q

Appraisal Costs Definition and Exampels

A

are associated with measuring and monitoring activities related to quality
Product Testing
Verification of Materials
Quality Control Procedures

Conformance Cost

64
Q

Prevention Costs Definition and Examples

A

are costs incurred to prevent or avoid quality
problems
Equipment Maintenance
Employee Training
Quality Planning

Conformance Cost

65
Q

External Failure Costs Definition and Examples

A

are costs incurred to remedy defects discovered
by customers
Repairs and Servicing
Warranty Claims
Complaints
Returns

Non-conformance costs

66
Q

Internal Failure Costs Definition and Examples

A

are costs incurred to remedy defects discovered
before the product or service is delivered to the customer
Spoilage
Scrap
Rework

Non-conformance costs

67
Q

Spoilage Definition and Formula

A

refers to units of production that do not meet the specifications required by customers for good units, and are discarded or sold at reduced prices

Total Spoilage = (Beginning WIP+Units Started) - (Units Completed+End WIP)

68
Q

Scrap Definition

A

is residual material that results from manufacturing a product

No difference made between normal and abnormal scrap
Scrap is either attributed to a specific job or all jobs
Scrap is either recognized at the time of sale or time of production
NO COST is assigned to scrap

69
Q

Rework Definition

A

refers to units of production that do not meet the specifications required by customers, but are subsequently repaired and sold as finished goods

Difference made between normal and abnormal rework
Rework is either attributed to a specific job or all jobs

70
Q

Normal Spoilage and Journal Entry

A

is spoilage inherent in a particular production process. This type of spoilage arises even when a process is carried out in an efficient manner, and spoilage costs are included as cost of good units

71
Q

Abnormal Spoilage

A

is spoilage that is not inherent in a particular
production process and would not arise under efficient operating conditions, and these costs are not considered inventoriable

72
Q

Process Costing Journal Entry for Normal Spoilage

A

There is no entry, treated as a normal cost in WIP

73
Q

Process Costing Journal Entry for Abnormal Spoilage

A

Debit: Loss from Abnormal Spoilage
Credit: Work in Process

74
Q

Job Costing Journal Entry for Normal Spoilage for specific job and all jobs

A

Specific Job – Normal Spoilage
Debit: Materials Control (@ disposal value)
Credit: Work in Process Control (Job 1)
All Jobs – Normal Spoilage
Debit: Materials Control (@ disposal value)
Debit: Overhead Control (total value - disposal)
Credit: Work in Process Control (total value)

75
Q

Job Costing Journal Entry for Abnormal Spoilage

A

Debit: Materials Control (@ disposal value)
Debit: Loss from Abnormal Spoilage (total value - disposal)
Credit: Work in Process Control (total value)

76
Q

Scrap Journal Entries at Time of Sale for Immaterial Scrap, Material Scrap-Specific Job, or Material Scrap-All Jobs

A

Immaterial Scrap
Debit: Cash
Credit: Scrap Revenue
Material Scrap – Specific Job
Debit: Cash
Credit: Work in Process Control
Material Scrap – All Jobs
Debit: Cash
Credit: Overhead Control

77
Q

Scrap Journal Entries at Time of Production for Specific Job and All Jobs

A

Specific Job
Debit: Materials Control
Credit: Work in Process Control

All Jobs
Debit: Materials Control
Credit: Overhead Control

Scrap When Sold
Debit: Cash
Credit: Materials Control

Scrap When Reused
Debit: Work in Process Control
Credit: Materials Control

78
Q

Normal Rework Journal Entry for Specific Job or All Jobs

A

Normal Rework – Specific Job
Debit: WIP Control (Job 1)
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated’

Normal Rework – All Jobs
Debit: Overhead Control
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated

79
Q

Abnormal Rework Journal Entry

A

Abnormal Rework
Debit: Loss from Rework
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated

80
Q

Master Budget Definition

A

is a quantitative expression of a proposed plan of
action by management for a specified period of time and an aid to coordinate what needs to be done to implement that plan
A budget consists of both financial (revenues, expenses, cash flows) and non-financial (production, purchasing, employee) elements

81
Q

Advantages of Budgeting

A

● Promotes Coordination and Communication
● Provides framework for judging performance
● Motivates managers and other employees

82
Q

Challenges of Budgeting

A

● Mismatch in incentives between different
levels of management
● Time consuming

83
Q

Variance Definition

A

is the difference between actual results and expected performance (budgeted performance)

84
Q

Unfavorable Variance

A

has the effect of decreasing operating income, relative to budget

85
Q

Favorable Variance

A

has the effect of increasing operating income, relative to budget

86
Q

Static Budget Variances

A

The full variance between the static budget and the actual budget

87
Q

Flexible Budget

A

calculates budgeted revenues and costs based on
the actual output during the budgeted period (and prepared at the end of the period)
A flexible budget represents the hypothetical budget a company would have used if it could predict sales/output exactly
Allows managers to view variances through two separate lenses – a flexible budget variance and a sales-volume variance

88
Q

Sales-Volume Variance Definition and Formula

A

is the difference between a flexible budget
amount and the static budget amount
𝑺𝒂𝒍𝒆𝒔 𝑽𝒐𝒍𝒖𝒎𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕 − 𝑺𝒕𝒂𝒕𝒊𝒄 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕

89
Q

Flexible Budget Variance Definition and Formula

A

is the difference between actual results and
the corresponding flexible budget amounts
𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑨𝒎𝒐𝒖𝒏𝒕 − 𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕

90
Q

Price Variance Definition and Formula

A

is the difference between actual price and budgeted price
𝑷𝒓𝒊𝒄𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑷𝒓𝒊𝒄𝒆 − 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑷𝒓𝒊𝒄𝒆 ∗ 𝑨𝒄𝒕𝒖𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝑰𝒏𝒑𝒖𝒕𝒔

91
Q

Efficiency Variance Definition and Formula

A

is the difference between actual input quantity
used and the budgeted input quantity
𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑸 𝒖𝒔𝒆𝒅 − 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑸 𝒖𝒔𝒆𝒅 ∗ 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑷𝒓𝒊𝒄𝒆

Cost Management (3 decks)

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